ETS reform, a new system for buildings and transport, and CBAM: fertilisers covered by the border mechanism

On 14 July 2021 the European Commission proposed a thorough reform of the EU emissions trading system (ETS), the creation of a separate system for fuels in buildings and road transport, and a carbon border adjustment mechanism (CBAM) covering, among others, fertilisers. The changes are to affect the prices of energy, fuels and agricultural inputs, and therefore also the economics of biogas plants.

What was proposed

• ETS – emissions reduction in the sectors covered by the system of 61% by 2030 compared with 2005; faster lowering of the allowance cap; gradual phase-out of free allowances; inclusion of maritime shipping.
• ETS2 – a new system for suppliers of fuels used in buildings and road transport; according to the proposal it would start in 2026, after an earlier monitoring period.
• CBAM – a charge for emissions embedded in imported goods: cement, steel, aluminium, fertilisers and electricity. Transitional period from 2023 (reporting only), full application from 2026.
• Social Climate Fund – funds for households and microenterprises most exposed to rising costs; future revenues from ETS2 were to feed the fund.

Significance for agriculture and biogas

Covering fertilisers under CBAM is particularly important for agriculture. The production of nitrogen fertilisers is very energy-intensive and uses natural gas; imported fertilisers from countries without a carbon price will be more expensive once CBAM is introduced. This may improve the relative attractiveness of organic fertilisers and processed natural fertilisers, including digestate, and increase interest in nutrient recovery technologies.

For biogas and biomethane producers, what matters is that fossil fuels in buildings and transport will be subject to an emission charge. This increases the competitiveness of renewable heat and fuels. At the same time, higher energy costs also affect biogas plants, which use energy for their own needs and for transporting substrates.

Polish perspective

Poland warned of rising energy and heat prices for households, especially those heated with fossil fuels. The Social Climate Fund was to compensate for these effects in part. For Polish fertiliser producers, CBAM in turn means a lower risk of unequal competition with imports; the CBAM reporting obligations, however, rest on importers, while domestic producers already report emissions under the ETS.

What next

The proposed changes require adoption by the European Parliament and the Council, which will follow negotiations. For investors this means a period of uncertainty about the level of allowance prices and the final shape of the mitigating mechanisms.

How this will translate to biogas plants

Biogas plants generating electricity and selling it on the market or in the auction system are usually outside the ETS because their capacity is small, but electricity prices depend on the cost of allowances in conventional power plants. Higher allowance prices raise electricity prices, which improves the revenues of RES generators selling at market prices. For installations operating under a guaranteed price scheme the effect is smaller, but contracts for difference limit the risk of price falls.